If you’re a U.S. expat running a foreign business, the check the box election is one of the most powerful tools available in your international tax planning toolkit. Designed to give flexibility in how your foreign business entity is treated for federal tax purposes, this election can dramatically change your tax consequences. Here’s everything you need to know.
What Is the Check-the-Box Election?
The check the box election allows certain eligible entities to choose how they want to be classified for federal tax purposes. Specifically, it gives foreign eligible entities and domestic eligible entities the ability to be treated either as a corporation, partnership, or disregarded entity.
By default, the IRS classifies a business entity based on ownership and location. A business entity wholly owned by one person defaults to a disregarded entity, while one with more than one member is generally classified as a partnership. However, with the check the box election, an entity elects to override these default classifications.
The form used to make this election is Form 8832, the “Entity Classification Election” form.
Why Does This Matter to U.S. Expats?
If you’re a U.S. citizen owning a foreign entity, you are taxed on your worldwide income. How your foreign business is classified can result in vastly different tax implications.
For example, if your foreign eligible entity is classified as a corporation, you may be subject to GILTI (Global Intangible Low-Taxed Income) or Subpart F income rules. Alternatively, if you choose to treat your foreign entity as a disregarded entity, its income flows directly onto your personal income tax return, possibly simplifying your reporting and allowing you to claim foreign tax credits more effectively.
Understanding the entity’s classification is critical for determining how income, losses, deductions, and credits are treated.
What Entities Can Make the Election?
Only an eligible entity can file Form 8832. An eligible entity is any business entity not automatically classified as a corporation under IRS rules.
Entities that are not eligible include:
A corporation incorporated under a federal or state statute.
Entities specifically listed in the IRS regulations, such as a regulated investment company, insurance company, or association taxed under Subchapter C.
An entity organized under a foreign government and specifically listed as classified as a corporation.
On the other hand, many foreign eligible entities (like UK Limited Companies or Irish DACs) can make the election.
Some examples of eligible entities include:
A newly formed entity that hasn’t yet filed its first return.
An existing entity that previously accepted the default classification.
A limited liability company (LLC) formed under a state chartered business entity statute.
How to make the check-the-box election on Form 8832?
To file a check the box election, you must complete and submit Form 8832 to the IRS. This form captures the entity classification election details and must be timely filed. Late elections are possible under late election relief provisions but come with additional requirements.
Key details include:
The name and EIN of the business entity.
The current and intended entity’s classification.
The date of the change.
For a newly formed domestic entity, the election must generally be filed within 75 days of formation. For foreign eligible entities, the rules are similar.
When the newly formed entity elects to be treated differently from the default classification, the IRS expects income tax returns consistent with that election.
Classification Options Under the Check-the-Box Regulations
Per the IRS check the box regulations, there are three main classification options:
Disregarded Entity: For a business entity wholly owned by one person, choosing this means the entity is separate from its owner for legal purposes but not for federal tax purposes. The income and expenses are reported on the owner’s personal income tax return.
Partnership: If the entity has more than one owner and chooses not to be taxed as a corporation, it will be classified as a partnership.
Corporation: The entity is treated as a corporation, either by default classification or through the check the box election.
The foreign default rule may classify many foreign entities as corporations automatically. But the check the box election allows you to opt out and choose to be treated as a disregarded entity or partnership, where applicable.
Strategic Uses for Expat Entrepreneurs
U.S. expats running a business abroad often use the check the box election to achieve favorable tax treatment.
For instance:
You operate a single-member UK Limited Company (foreign eligible entity). By default, it is classified as a corporation. Using Form 8832, you can elect for it to be treated as a disregarded entity.
This allows for more effective use of foreign tax credits and potentially avoids GILTI.
In contrast, if you’re planning to reinvest profits and take advantage of Section 250 deduction, keeping the foreign corporation status might make sense.
Each situation is different, and the tax consequences depend on where the business entity organized, ownership structure, local taxes, and more.
Limitations and Special Rules
There are restrictions. Some foreign entities specifically designated under IRS rules (like joint stock companies or joint stock associations) are always classified as a corporation.
Also, once a check the box election is made, you generally can’t change the entity’s classification again for five years unless there’s a significant change in ownership or operations.
Certain entities like a tax exempt entity, association taxable as a corporation, or a small business corporation under the Internal Revenue Code may face restrictions or be ineligible.
Tax Compliance Considerations
Making the entity classification election is only one piece of the puzzle. The IRS expects:
Timely and correct filing of Form 8832.
Accurate income tax returns consistent with the election.
Understanding of ongoing compliance obligations, such as Form 5471 for foreign corporations, or Form 8858 for foreign disregarded ent
Once you make an election to treat the foreign company as a disregarded entity, you will need to file Form 8858 instead of Form 5471. Failure to comply can lead to penalties and unintended tax liability.
Also, note that if the entity is separate from its owner under local law but treated as a disregarded entity for U.S. federal income tax purposes, it can trigger complexity in reporting.
Entities connected to a foreign government, political subdivision thereof, or federally recognized Indian tribe are generally exempt from these rules, provided a similar federal statute or the Federal Deposit Insurance Act applies.
Making the Right Classification Choice
The check the box election gives U.S. expats the flexibility to structure their foreign eligible entities in a tax-efficient manner. Whether it’s minimizing exposure to anti-deferral regimes, reducing compliance burdens, or leveraging foreign tax credits, this election plays a critical role in international tax planning.
However, making the wrong choice can result in adverse tax implications. It’s vital to understand the entity’s classification, the effect of the federal default rule, and your reporting obligations.
At 1040 Abroad, we help U.S. expats navigate the complex terrain of federal tax law, compliance, and cross border tax arbitrage. From deciding how your newly formed entity should be treated, to handling late entity classification elections, our team of experts is here to guide you every step of the way.
Get in touch today to ensure your foreign entity is properly classified and your income tax obligations are fully optimized.
